Dollar Set for Weekly Drop as Traders Slash Rate Hike Bets After Soft Inflation Data

The dollar steadied on Friday but remained on track for a weekly loss after a softer-than-expected U.S. inflation report prompted traders to sharply reduce wagers on near-term Federal Reserve interest rate increases. Escalating hostilities between Iran and the United States, which have largely unraveled last month’s truce, provided a counterweight by fueling safe-haven bids for the currency.

The dollar index, which measures the greenback against six major peers, was little changed at 100.72, set for a weekly decline of 0.24%. The index touched a one-month low earlier in the week as the odds of a rate hike receded, but safe-haven flows helped limit further losses.

**Rate Hike Outlook Dims**

Data released Thursday showed U.S. retail sales rose slightly in June, with lower gasoline prices weighing on receipts at service stations but online spending surging. The figures prompted economists to upgrade their second-quarter growth estimates. Separate data underscored labor market stability.

Despite the economy’s resilience, economists believe the Federal Reserve will keep interest rates unchanged at its meeting later this month after consumer price inflation cooled in June. Policymakers, however, remain wary of relying too heavily on a single month of improvement after months in which inflation moved in the wrong direction.

According to the CME FedWatch tool, the implied probability of a Fed hike in July stood at 11%, down sharply from 25% last week. Traders are pricing in 26 basis points of cumulative hikes by December, compared with 44 basis points earlier this week.

Federal Reserve Vice Chair Philip Jefferson suggested he would be open to raising interest rates if inflation does not show near-term improvement.

“I don’t think July is live for rate hikes,” Tani Fukui, senior director of global economic and market strategy for MetLife Investment Management, told Reuters. “We expect neither rate hikes nor cuts in 2026.”

**Geopolitical Tensions Support Dollar**

Iran and the United States exchanged intensifying fire over the past week, spurring safe-haven demand for the dollar and pushing oil prices near one-month highs. The conflict has curtailed appetite to sell the greenback, according to Derek Halpenny, a senior currency strategist at MUFG.

“There has been no let-up in the escalation of the conflict in the Middle East which continues to curtail appetite to sell the dollar,” Halpenny told Reuters, adding that U.S. data releases on Thursday also helped curtail dollar selling.

OCBC strategists described the dollar as “the highest-yielding safe-haven currency in the G10 complex.” They said near-term foreign exchange price action is likely to reflect the “USD smile” framework, under which the greenback tends to outperform when markets price either stronger U.S. growth and higher rates or a rise in global risk aversion.

**Currency Moves**

The euro was flat at $1.1445, on track for a 0.29% rise in the week. Sterling edged up to $1.3476, heading for a 0.56% weekly gain — its third straight week of advances — as fading concerns over Britain’s fiscal outlook supported the currency.

The Japanese yen strengthened slightly to 162.39 per dollar, but remained near the 40-year low of 162.84 touched at the start of the month. Traders remained wary of official intervention from Tokyo after Japanese Finance Minister Satsuki Katayama reiterated the government’s readiness to take decisive action.

The Australian dollar was poised for a third straight weekly gain but eased 0.24% on Friday to $0.6981 as risk-off sentiment prevailed. China’s yuan weakened from a one-month high against the dollar but remained on track for its third consecutive weekly rise.

Investor attention later in the session will focus on a speech by U.S. President Donald Trump, scheduled for 0100 GMT.